Active Share

Active share was introduced to the investment literature by Martijn Cremers and Antti Petajisto in their 2009 paper published in the Review of Financial Studies, titled 'How Active Is Your Fund Manager? A New Measure That Predicts Performance.' The metric immediately gained traction among institutional investors as a straightforward, holdings-based diagnostic for distinguishing genuinely active managers from closet indexers who charge active fees while taking minimal benchmark deviation.

The calculation is conceptually simple. For each security, the absolute difference between its weight in the portfolio and its weight in the benchmark is summed across all securities, and the total is divided by two to avoid double-counting. A fund that holds every benchmark constituent at exactly its benchmark weight has active share of 0%. A fund that holds no benchmark securities at all — or holds them at dramatically different weights — has active share approaching 100%.

Formula: Active Share = (1/2) x Sum of |Portfolio Weight(i) - Benchmark Weight(i)| for all securities i.

In their original research, Cremers and Petajisto found that funds with the highest active share — above 80% to 90%, which they labeled concentrated stock pickers — delivered statistically significant outperformance on average, net of fees. Funds with low active share — closet indexers — significantly underperformed on average after fees. This finding was influential in directing institutional due diligence toward active share as a screening criterion.

However, subsequent research has refined and partially complicated the original findings. Studies found that the outperformance of high-active-share funds was largely driven by small-cap concentrated funds, where benchmark indices are naturally easier to deviate from. High active share alone is neither necessary nor sufficient for skill — a concentrated manager can be skillful or unskillful, and high active share in a large-cap fund necessarily implies higher tracking error, which may be unwanted in certain institutional mandates.

In the U.S. institutional context, active share is now a standard component of manager evaluation alongside tracking error, information ratio, and Sharpe ratio. The Institutional Shareholder Services and major consultant databases routinely report active share for fund evaluations. Some institutional mandates explicitly require minimum active share thresholds — often 70% to 80% — as a condition of appointment.

For retail investors, active share is not always readily visible in standard fund marketing materials. Many fund managers publish it voluntarily, and it is available through Morningstar Direct and Bloomberg for subscribers. Calculating it independently requires publicly available quarterly 13F holdings data combined with the benchmark composition, which is accessible through most fund providers' regulatory disclosures.